While you were sleeping Spain, McDonald's sink stocks

Tuesday 24th July 2012

Equities slumped on concern that Europe's crisis is deepening as one region of Spain called for financial assistance and others are expected to follow soon, prompting fears the euro zone's fourth-largest economy might need a full rescue.

"Investors are on edge," Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock, told Bloomberg News. "Chinese growth has slowed. It's not clear that the existing firewalls in Europe are large enough. We knew the Spanish regional governments had debt. The question is: how bad is it?"

Wall Street also had to contend with signs of trouble closer to home. Quarterly earnings by McDonald's fell short of expectations, clearly reflecting the global economic slowdown. Shares were last down by 2.4 percent.

"We're seeing more markets that are having consumer confidence issues and at what we consider to be more-substantial levels," McDonald's Chief Executive Officer Don Thompson told analysts on a conference call. "It's a little more than a European cold."

In late afternoon trading in New York, the Dow Jones Industrial Average dropped 0.94 percent, the Standard & Poor's 500 Index shed 1.07 percent, while the Nasdaq Composite Index slid 1.46 percent.

Wall Street's so-called fear gauge, the CBOE Volatility Index, soared more than 25 percent to 20.49 earlier in the day. The VIX was last up 14 percent at 18.60.

"While the actual VIX level is quite low at the moment, some of the volatility-related indicators are waving the flag of caution this week," Randy Frederick, managing director of active trading and derivatives at Charles Schwab, told Reuters.

Investors flocked to US Treasuries and German bunds. The yield on the 10-year US Treasury note fell to a record-low 1.40 percent, while the yield on Germany's two-year note was below zero for the 12th consecutive day, according to Bloomberg.

As equities across the euro zone dropped amid concern other Spanish regions will follow Valencia in seeking a bailout, Italian and Spanish market regulators announced bans on short-selling.

Europe's Stoxx 600 Index slumped 2.5 percent for the day.

Data released today showed that Spain suffered its third consecutive quarter of recession as the economy shrank by 0.4 percent from the previous quarter. Bond yields jumped, pushing the country's 10-year yield to a record 7.5 percent, a level widely considered unsustainable.

Fanning concern about the euro crisis are doubts whether Greece will be able to secure the next tranche of funding from its second international bailout, though the International Monetary Fund dismissed a report in Der Spiegel that it may refuse to do so.

"The IMF is supporting Greece in overcoming its economic difficulties," an IMF spokesperson said.

Officials from the IMF, European Union and European Central Bank arrive in Athens tomorrow to check whether Greece has kept up its deal of the bailout bargain by meeting the terms.

Bucking the trend, Goldman Sachs Group provided an upbeat note on US homebuilders, saying they are an attractive investment as the housing market starts a "strong" recovery that may drive a surge in new-home sales.

Housing has a "long list of positives," including rising prices, job growth, supportive government policies and a decline in the so-called shadow inventory of homes, Goldman Sachs analysts Joshua Pollard and Anto Savarirajan wrote in a note to clients, according to Bloomberg. They raised their rating on the homebuilding industry to attractive from neutral.

BusinessDesk.co.nz

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